Trends, Trend-spotting, Uptrends and more

Up trend, down trend, no trend?

Trend-spotting! - How and why to identify
a price trend, and how to profit from it!

Why is the notion of a trend important?

One of the key tenets of Dow Theory basically says:

Once a trend is in place, then it is likely to remain in place; and
the trend continues to exist until it is confirmed to have ended.

This is very important, and it is a fundamental principle that underlines a lot of the success in the market. For more information about Dow Theory, see the More Information list at right.
 
Why is this important or useful? Because if we can identify a rising trend in a stock, and buy some of the stock, we can ride the trend as it rises.

Brainy's "3Ways Rule (in 3 Times)"

Any stock or index will always be trading
in one of 3 "ways":

• in an up trend, or
• in a down trend, or
• there will be no trend.

This is a simple re-statement of a tenet of Dow Theory; but it is a useful way to remember a simple fact about the price chart. That the chart will show an up trend, or a down trend, or no trend.
 
See more information on the 3Ways Rule.

How to spot a trend

There are a number of ways to spot an up-trend:

1. The simplest eye-ball call.
   On a price chart, if the price starts in the bottom left corner and finishes in the top right corner, it must be trending up (as in the sample at right - click on the image for a larger version).
   
   
2. Higher Highs and Higher Lows.
   A rising trend is described in classical Dow Theory as a series of Higher Highs and Higher Lows. This is demonstrated in the sample chart at right, where each Higher High is denoted with "HH" and each Higher Low with "HL". The terms "higher peak" and "higher trough" are also in common use in reference to a rising trend.
   
   
3. Trend Line.
   As a price moves higher, it may be possible to place a rising straight line under the share price (as in the chart image above). This line appears to act as a "floor" to support rising prices. As long as the price stays above the trend line, then the up-trend is said to be in place. Once the price breaks below the trend line, then the trend is said to have failed.
   
   
4. Moving Average.
   We can use a Moving Average chart indicator on the price chart to indicate whether a price is "trending" up or down (or not at all). In the sample Monthly price chart at right (click on the image for a larger version), a Moving Average (MA) is shown as a blue line. It can be inferred that where the MA is rising, the stock is also tending to rise (ie. uptrending). Conversely, a falling MA suggests the stock is trending down. Of course, the picture might be different on a weekly or daily chart, and the number of periods we use in the MA indicator can also make a difference. For a realistic example of using this idea to spot rising trends, see Brainy's Weekly Watch List strategy.

The health and strength of a trend - MMA

The health and strength of a trend can be quickly determined using a number of different technical analysis chart tools, including the Multiple Moving Average (MMA) indicator on the price chart. There are more than a couple of these in existence in good charting software packages including the Guppy MMA (or GMMA for short) and the Hull MMA.

The sample chart at right is the same chart as shown in the MA example above, except that this time a Guppy MMA indicator is included. At first glance, this indicator looks complex; but it is not. It is comprised of 12 MA lines - a group of 6 blue ones, and a group of 6 red ones. For the trained analyst, this is very helpful in telling us about the health and nature of a trend (the mood and sentiment).
 
See a sample use of the GMMA in Robert's Weekly Market Analysis.

Other tools for determining trend strength include: the simple trend line, a simple linear regression line, Alan Hull's ROAR indicator and the ADX indicator.
 
For more information, see the eBook Articles listed above right.

How to quickly find a trend with little effort

If you are using good charting software, with a good scan tool, then it is not hard to quickly scan through a long list of stocks and display a short list of the stocks that currently exhibit the characteristics of a trend.
 
One good software tool is BullCharts, where it is possible to easily create a scan to search for trending stocks. Brainy's eBook (PDF) Article BC-10-400, "Scans - Match (not) all criteria" (page 2), discusses this.

And a down-trend...

It is not only up-trends in which we are interested; but also down-trends. If we feel that a stock in a down-trend is over-sold and potentially a great bargain, we can monitor the price chart for a confirmed break of the down-trend. And those people who are happy to short-sell a stock, can look for confirmed down trends, and sell into the down-trend.
 
To visually spot a down-trend on a price chart, we look for the opposite of the signs of an uptrend - a series of Lower Highs and Lower Lows (or Lower Peaks and Lower Troughs).
 
A down trend is demonstrated in the weekly price chart of National Australia Bank (NAB) at right from late 2007 until mid-2009 (click on the chart for a larger image). NAB fell 61% from $43 to $16 over a 16 month period during the so-called infamous GFC (btw - imagine a blue chip stock falling 61%!). The comments on the chart at right explain the red down-trend line, and the observed break-out in March 2009.
 
In this chart of NAB we have placed a downward straight line above the price action, and it appears to act as a ceiling to prevent prices from rising. Once the price does break above the down-trend line, it can be said that the trend is over (as indicated toward the end of this sample chart).

More information?

More Information

• TA-2200 "Dow Theory" 

• ST-6120 "Trends are important and the 3Ways Rule" 

• TA-3200 "Trends and trendlines" 

• TA-3210 "Trends - primary and secondary" 

• TA-3220 "Trend strength" 

• TA-6200 "Daryl Guppy - GMMA - introduction" 

• TA-6210 "Daryl Guppy - GMMA - interpretation" 

• BC-10-105 "BullScan - introduction"

• BC-10-120 "BullScan - key features"

• BC-10-200 "BullScan Manager"

Robert writes information from time to time about the market and investing. If you are not a Toolbox Member, you can register to receive useful free information as it is published. Click here to register interest For Email Marketing you can trust Privacy ensured, unsubscribe anytime. See the Testimonials - the things that people say about the Toolbox and more.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.

© Copyright 2011-2012, R.B.Brain - Consulting (ABN: 52 791 744 975).
Last revised: 25 September, 2012.